Distressed debt funds line up new year raids

Distressed debt specialists have been raising funds in anticipation of
opportunistic swoops on struggling companies, as the recession takes hold
next year.

By Helia Ebrahimi

7:59PM GMT 21 Dec 2008

Industry sources say private equity and distressed debt specialists have raised about $26bn (£17bn) since the start of October, with some 80pc coming from hedge funds.

Distressed debt funds, which buy debt that is trading at a discount because the borrower is at risk of defaulting, have been around for years but specialists are looking forward to a bonanza year in 2009.

Among the biggest distressed debt fund raisings since October have been Oaktree, which has secured $10.5bn, Towerbrook with $2.75bn, Intermediate Capital with $1.5bn, and Alchemy with $1bn. Hedge funds are also aiming to buy distressed debt directly from banks that are under pressure to offload liabilities to shore up their balance sheets.

Secondary debt, even senior loan notes, often trade below 70p in the pound and yield 25pc over five years if the debt is held – and survives – to maturity. If a company is strugglings with its covenants, debt holders can strike debt-for-equity swaps in return for keeping a company afloat – often a cost effective way of getting a seat at the table or control of a business.

Industry experts say the new ownership of debt will inevitably lead to a flurry of battles for control of a number of highly geared but cash-poor companies over the coming months in the hope of turning them around and making big profits from this.